Relief for Distressed Businesses
Businesses who are struggling financially as a direct result of the covid-19 pandemic will benefit from both permanent and temporary measures which are being fast tracked through parliament. For instance, one of the particularly notable measures will affect how termination causes can be employed by suppliers in the event of a business’ financial difficulties.
Many business that would otherwise be financially viable are experiencing very significant trading difficulties with a nosedive in demand, delays in the delivery of essential supplies and, of course, cashflow issues.
Some sectors are being particularly hit hard, such as hospitality: a number of restaurants will not be reopening after the crisis (for example, Frankie & Benny's has announced it will permanently close 125 UK restaurants); and retail (Debenhams is to permanently close some its stores). Those that are not yet feeling the full affects may well do further down the line.
Background to the bill
The Corporate Insolvency and Governance Bill 2019-21 is quickly making its way through the commons (the report stage and third reading took place on 23 June).
The bill is being expedited by government on the basis that measures are urgently needed to support businesses during the current crisis and, says government, “to give viable companies the flexibility and breathing space they need to continue trading”.
It includes both permanent changes to insolvency laws and temporary changes (retrospective in nature) to both insolvency law and to corporate governance.
Broadly, the bill makes provision for companies and other entities in financial difficulty; and to make temporary changes to the law relating to corporate governance and regulation. So what will the impact be on distressed businesses against the background of covid-19?
Permanent measures
These include a new free-standing moratorium for companies in the UK which would give distresses businesses a ‘breathing space’ to work out a suitable rescue or restructuring plan.
Of particular note is the widening of the “ipso facto” (termination) suspension provisions. These clauses allow a contract to be terminated in certain circumstances, such as a party’s bankruptcy or insolvency or other specific financial condition.
So the changes will effectively prevent suppliers from halting their supplies of goods and or services to companies who have gone into an insolvency or restructuring procedure.
Ipso facto clauses are particularly common in certain types of contracts. Nearly all facility agreements, for instance, contain an ipso facto clause in the form of an event of default triggered by a borrower entering insolvency proceedings.
Ordinarily, suppliers who terminate their contracts in this way may be protecting their own position but it puts any chance of a rescue attempt at greater risk so the measure will amount to a vital safeguard to ensure supplies continue and can also be paid for. It should bolster the chances of struggling businesses to survive the pandemic and its negative effects.
Suppliers will not be left hung out to dry by this measure as there will also be provision to relieve suppliers of their obligation to supply if it was to cause themselves financial difficulties. They will be able to apply to court to allow termination on grounds of hardship. Also, note that this measure does not, at least temporarily, apply to small company suppliers during the covid-19 emergency.
Temporary measures
There is also a range of temporary measures in the bill aimed at helping business in the short term to avoid insolvency and survive as a going concern. These include, notably, the temporary suspension of directors’ personal liability for wrongful trading; the suspension of statutory demand provisions and restrictions on winding-up petition.
The bill is big; it is complex, it is technical and businesses must take specialist advice on how it impacts their operations.
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